Linking social benefits to contributions can backfire, costing governments more

A World Bank paper finds that linking social benefits to how much people pay in taxes can actually cost governments more money. People underreport their income to avoid taxes, then temporarily report more to qualify for benefits, which can increase overall program costs.

Governments often design social programs, like parental leave, to require a certain amount of prior tax contributions, assuming this reduces fraud and ensures fairness. This paper shows that people game these systems by temporarily formalizing their income to qualify, which can lead to higher payouts than if the system were designed differently.